Avista Corporation — Q2 2020 Form 10-Q
Business context and reporting period
Avista is primarily a regulated electric and natural gas utility serving the Pacific Northwest and Juneau, Alaska, with smaller non-utility businesses. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Operating revenue | $278.6 million | $300.8 million | $668.8 million | $697.3 million |
| Operating income | $34.9 million | $39.8 million | $117.1 million | $106.8 million |
| Net income attributable to Avista shareholders | $17.5 million | $25.3 million | $65.9 million | $141.1 million |
| Diluted EPS | $0.26 | $0.38 | $0.98 | $2.14 |
| Cash from operating activities | Not separately provided for the quarter | $199.9 million | $252.7 million |
For Avista Utilities, non-GAAP utility margin was $201.3 million in Q2, essentially unchanged from $201.3 million a year earlier; first-half margin rose to $448.9 million from $440.3 million. Q2 electric margin declined $2.3 million while natural gas margin increased $2.3 million. These margin measures exclude resource costs from operating revenue and are not GAAP measures.
At June 30, cash and cash equivalents were $116.4 million, versus $9.9 million at year-end 2019. Total debt, including short-term borrowings and current debt, was approximately $2.40 billion, compared with $2.26 billion at year-end. Short-term borrowings were $321 million. Shareholders’ equity was $1.98 billion. Management reported a 54.8% debt-to-total-capitalization covenant ratio and compliance with financing covenants.
Six-month utility capital expenditures were $189.5 million. Cash dividends paid were $54.7 million; dividends declared were $0.81 per share for the half year. Management expected to issue approximately $165 million of long-term debt and up to $70 million of equity during 2020, including $23.9 million of equity already issued by June 30.
Material changes versus the prior period
- Q2 revenue fell about 7% year over year and shareholder net income fell about 31%. Management attributed the earnings decline mainly to lower utility margin from power supply costs and COVID-related load reductions, partly offset by rate relief, customer growth, and lower operating expenses.
- First-half net income fell substantially from 2019, which included a $103 million Hydro One merger termination fee. 2019 also included $19.7 million of merger transaction costs. The fee makes the year-over-year earnings comparison unusually high in the prior period.
- First-half operating income increased despite lower revenue, supported by lower resource costs. Earnings also reflected higher operating and depreciation expenses, customer refund accruals, and a Colstrip replacement-power disallowance, partly offset by lower income tax expense.
- Operating cash flow declined by $52.8 million year over year; management cited the prior-year merger termination fee and changes in working capital and regulatory power and gas deferrals.
Outlook, management commentary and risks
- COVID-19: Management reported reduced commercial and industrial demand, higher bad-debt expense, and supply-chain delays of up to six weeks in some cases. It expected a gradual recovery but prolonged high unemployment to weigh on load and customer growth into 2021. First-half bad-debt expense was $3.3 million above expectations; management forecast a further $2.4 million increase for the rest of 2020 versus its original forecast. The company had filed to defer certain incremental costs; recovery remains subject to regulatory review.
- Liquidity: Avista drew the full $100 million available under a new credit agreement due April 2021. Management reported $159.6 million available under Avista’s $400 million revolving facility and $25 million under AEL&P’s $25 million facility, and said available resources were expected to cover the next 12 months. It cautioned that market disruption could raise financing costs or limit capital-market access.
- Rates and customer refunds: Washington approved annual base-revenue increases of $28.5 million for electric service and $8.0 million for natural gas, effective April 1, 2020, while also requiring return of about $40 million of ERM rebates over two years. A separate order requires $8.5 million of refunds related to the 2015 rate cases, returned over one year beginning April 2020. Management expected to file electric and gas rate cases in Washington and Idaho in Q4 2020. Its Oregon gas rate request sought a $6.8 million annual revenue increase; a partial cost-of-capital settlement reduced the requested increase by $1.1 million.
- Colstrip: A Washington order disallowed about $3 million of replacement-power costs from a 2018 outage, and accelerated depreciation of Units 3 and 4 through 2025. Tax benefits offset part of the depreciation increase. The order also provided for $3 million of community transition funding, split between customers and shareholders.
- Other notable risks: Three lawsuits relate to the 2018 Boyds Fire in Washington, including a state claim seeking up to $4.4 million for fire-response costs; Avista disputes liability. The company is implementing a 10-year wildfire resiliency plan expected to cost about $330 million. It also cited uncertainty around Oregon greenhouse-gas rulemaking, pension funding, regulatory cost recovery, commodity prices, and potential collateral demands on derivatives.
Most important facts for investors to verify
- How COVID-19 affects customer demand, customer payments, bad debt, deferred costs, and operating cash flow, and whether regulators authorize recovery of deferred amounts.
- Liquidity and refinancing plans, including the $100 million credit agreement due in April 2021, planned debt and equity issuance, and covenant headroom.
- The timing and financial impact of rate cases, the $8.5 million refund, and the $40 million ERM rebate.
- Potential outcomes and exposure from the Boyds Fire litigation, Colstrip obligations and disallowances, and the wildfire resiliency plan.
- The effect of the 2019 Hydro One termination fee on comparisons, and whether ongoing utility operating performance supports future earnings and dividends.